HCBK (MM)

Regional bank People's United Financial Inc.’s (PBCT) reported fourth-quarter 2011 operating earnings per share of 17 cents, missing the Zacks Consensus Estimate by 2 cents. Moreover, earnings compared unfavorably with 19 cents per share reported in the prior quarter, but up by 10 cents reported in the prior-year quarter.

Quarterly results were impacted by lower top line coupled with a downtrend in credit quality due to economic weakness. However, lower non-interest expenses reflected better expense management.

Operating income reported was $58.7 million compared with $67.3 million in the prior quarter and $36.7 million in the prior-year quarter. Including after-tax merger-related expenses and other adjustments of $15.7 million, net income came in at $43.0 million or 12 cents per share in the fourth quarter of 2011.

For full-year 2011, operating income was 68 cents per share, more than doubled from 35 cents reported in the prior year, outpacing the Zacks Consensus Estimate by a penny. Including after-tax merger-related expenses and other adjustments of 11 cents per share, net income summed to 57 cents.

Performance in Detail

Total revenue reported was $313.8 million in the quarter, below the Zacks Consensus Estimate of $322.0 million. Moreover, revenue was down 3.4% sequentially, due to lower non-interest income while spiked 21.7% year over year.

For full year, revenue was $1,231.2 million, up 27% from $969 million in 2010. Moreover, this compares favorably with the Zacks Consensus Estimate of $1,227.0 million.

Despite historically low interest rate environment and the company's asset sensitive balance sheet, net interest income reported was $242.1 million, up 0.9% sequentially due to higher net interest margin (NIM). Moreover, net interest income also jumped 27.6% year over year.

Net interest margin increased 5 basis points sequentially to 4.16% attributable to the company’s expense management. Moreover, margin climbed 29 basis points year over year. Excluding $5 million of cost recovery income from the acquired loan portfolio, NIM came in at 4.07%.

Non-interest income was $71.7 million, down 15.3% sequentially, attributed to decline in bank service charges driven by changes brought by the Dodd-Frank Act and lower net security gains. However, income spiked 5.3% on a year-over-year basis.

Non-interest expense inched down 0.7% sequentially to $230.2 million. The decrease in expenses was attributable to lower merger-related expenses, reflecting the continual gain from cost-savings initiatives, previously announced in 2011. However, expenses increased 15.6% compared with the prior-year period.

Credit Metrics

People’ United witnessed a deteriorating credit quality during the reported quarter, attributable to the economic weakness. The company reported $20.7 million of provision for loan losses, up from $14.4 million in the prior quarter and $10.9 million in the prior-year quarter.

Moreover, net loan charge-offs totaled $14.8 million, up from $13.4 million in the prior quarter and 10.9 million in the prior-year period. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.29%, up 2 basis points sequentially and 1 basis point year over year.

As of December 31, 2011, People's United's nonperforming loans totaled $249.0 million, ratio of nonperforming loans to total loans was 1.75% compared with $241.6 million and 1.60%, respectively, as of September 30, 2011. However, this was lower than $359.8 million and 1.70%, respectively, as of December 31, 2010.

Nonperforming assets (excluding acquired non-performing loans) totaled $337 million as of December 31, 2011, up from $305 million in the prior quarter and $303 million in the prior-year quarter. Nonperforming assets were 2.00% of total loans, REO and repossessed assets, compared with 1.88% in the previous quarter and 2.09% in the year-ago quarter.

Capital Ratios

In the fourth quarter of 2011, return on average assets was 0.86% and return on average tangible stockholders' equity was 7.4%, down from 0.98% and 8.0%, respectively, in the prior quarter.  As of December 31, 2011, People's United’s tangible equity ratio plummeted to 12.0% from 12.5% in the prior quarter.

Capital Deployment Update

Concurrent with the press release, the board of People's United declared a quarterly dividend of 15.75 cents per share, payable on February 15, 2012 to shareholders of record as of February 1, 2012. Based on the closing stock price on January 18, the dividend yield came in at 4.2%.

Our Take

Within People’s United’s peer group, Hudson City Bancorp Inc.’s (HCBK) will report its fourth-quarter 2011 earnings on January 25, 2012.

The banks’ existing presence in Massachusetts coupled with the completion of Danvers Bancorp’s acquisition in 2011, make People’s United New England’s largest independent bank and the seventh largest bank, both in Massachusetts and Boston MSA.

Overall, People's United is trying to overcome the challenging economic environment through opportunistic acquisitions and cost reduction initiatives. The acquisitions and positive earnings reflect its strong capital and liquidity position. Going forward, growth in loans and deposits are expected to boost the company’s financial results. However, recent regulatory issues and economic weakness might act as headwinds.

People's United currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain our ‘Neutral’ recommendation on the stock.

 
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